There are a number of ways to hedge against inflation, such as gold and silver, but as the prices of precious metals languish, Treasury inflation-protected securities (TIPS) are another option.
TIPS can help stem the tide of rising inflation. The principal balance of TIPS increases as inflation rises, and investors are paid the original balance or the inflation-adjusted balance, whichever is greater.
“There are few financial relationships that have held up as well as that between the price of gold and the yield on inflation-protected Treasuries,” says the Buttonwood column in the latest edition of The Economist magazine. “The lower real, safe yields are, the greater the appeal of an asset without a yield that may rise in value.”
“Over the past decade, though, gold has been the less reliable of the two,” the column adds.
Getting TIPS Exposure in One ETF
One way to get exposure to TIPS is via exchange traded funds (ETFs) like the Invesco PureBeta 0-5 Yr US TIPS ETF (PBTP). If the Fed raises interest rates in the near future, PBTP limits duration to five years or less, thereby limiting rate risk.
PBTP seeks to track the investment results of the ICE BofA 0-5 Year US Inflation-Linked Treasury Index. The fund generally will invest at least 80% of its total assets in the securities that comprise the underlying index.
The index is designed to measure the performance of the shorter maturity subset of the U.S. TIPS market, represented by TIPS with a remaining maturity of at least one month and less than five years. Fewer years means that investors are less exposed to duration risk.
Keeping bond investments within the U.S., PBTP also reduces the risk for fixed income investors who are also looking to diversify outside the U.S. Global inflation is already rearing its ugly head in areas such as the Eurozone, where inflation is reaching historic highs.
“The eurozone’s annual rate of inflation rose further in December, reaching the highest print in history, which was posted more than thirty years ago in July 1991,” MarketWatch reports. “Consumer prices rose 5.0% on year in December following a 4.9% rise in November, according to a first estimate released Friday by Eurostat, the European Union’s statistics agency. Consumer prices rose 5.0% on year in July 1991, marking the highest point in history until December 2021.”
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